With a better job market, the next test of the resilience of this expansion will be higher mortgage rates. Unexpected strength in employment growth was good news indeed, but the flip side to a stronger economy is that the Fed will likely raise rates if the job growth is sustained. Though there are many reasons to believe that the housing market will remain robust through 2004, the risk of a serious downturn in the next few years is clearly increasing – particularly in areas of the country where home prices have risen the most. Affordability is at the heart of the housing market's vulnerability to rising interest rates because it is the ability to afford the payments on a high-priced home that is directly affected when rates rise, not the actual home price. Additionally, rising...
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